Mastering innovation investment: navigating investment panels & growth boards

Today's topic is Mastering Innovation Investment and Navigating Innovation Panels and growth Boards. The reason we wanted to really focus on this topic is because a lot of you may be aware we have an advisory and coaching arm and quite often when we work with large corporations from around the world to set up their innovation ecosystem, the number one question they ask us is what does that governance model look like? And so through our many years of working with these corporates, consulting with them and learning along the way the best practices and our advice, we've distilled it all down here to share with you for our last webinar of 2023. So we hope you enjoy the topic and find it relevant to your work and your role as well. Your host today is Alex Osterweilder, Founder and CEO of Strategizer, and myself, Lucy. I am the head of Content and Marketing here at Strategizer and I am based out of Melbourne, Australia. And the agenda for today, firstly we'll start off with a poll, then we'll talk about the content of today's session which is growth boards, investment panels and their roles. Next we dive into, well, who really does belong? Investment panels and growth boards. And quite often this is also a tough question that our clients ask us as well, who should really be on these investment panels. And lastly, governance and decision making and what that looks like for the people within these investment panels and growth boards.

Growth boards, investment panels and their role. And I think what's, what's really important to understand is that 80% of companies do, you know, put, put innovation as one of the top things. But if you look at how many companies, you know, realize that their business models are going to Inspire is still 40%. And here's the interesting one, if we look at the permanent structures, how many companies believe they're ready to scale innovation and they have a really good structure to do this, it changes a lot, right? So one of the key things that we want to go into today is one aspect of governance which is the growth board and the investment panel where leaders and, you know, expanded and expanded view, we make decisions in an evidence based way. So we invest in the ideas that have most evidence to support what they are doing. So what we, what I want to set up first before we kind of get into the details is how, you know, innovation works inside organizations and where it lives. So big one is that we start with an idea, could be technology, could be a market opportunity and we search for a business model or a value proposition or simply a solution that can work Right. Something innovative that we don't know if it's going to work. We're in a search if it works. And once you found that, you scale and you manage. And as we've presented a couple of times in these webinars, it's really important to set it up here again is that the left hand side, the search and scaling and managing are very different. So the innovation part is exploration. Here we need completely different governance, different rules than over here where we scale and where we manage. So the way we like to look at it is this continuum from explore to exploit. And what we've showed a couple of times, I'll get back to it, is how those two domains differ. Growth boards need to understand that in execution, low uncertainty and high predictability, we can write business plans. In innovation, predictability is very low, so we have higher unpredictability. So we need to iterate and test what that means also is that investments are different. On the right hand side we analyze and make big bets. On the left hand side, we make a lot of small bets. So when teams ask for money, the executives who are on the growth board need to understand we're just providing some small investments for them to go to the next phase, not to fund the idea per se. That's a huge difference. And the questions they ask are different from their usual daily execution questions. So when you ask a supply chain team some questions, are you on budget, on track, that's fine. But when you ask innovation teams, it's super important to ask, what did you learn? And this sounds trivial, but most people who are not educated in doing this, they're always going to ask feasibility questions. But can we actually do that? Can we scale that technology? That's not the first thing you need to ask. You need to ask, do we have evidence for those customer jobs, pains and gains? Do we have evidence that we can create value for them? Do we have evidence that they actually are willing to pay? So huge, huge difference between those two worlds. So super important. Now, last foundational piece before we get to the definition of growth boards and investment panels is that you decide on a series of teams, which ones get follow up investment, not which idea are we going to fund, but which teams with which ideas get investment to go to the next phase. So an example that we show a lot, and we can refer to some videos on YouTube where this is public, is the Bosch business model accelerator case where we show that from 200 plus ideas, they invested in a few to get something like 20 winners, right? 19 winners here. And this is a funnel. So the growth board's role is to look at the teams that went through a first sprint, a first phase, and decide if they have enough evidence to get money for the next phase. And those who do not have enough evidence, they are successfully retired. Okay, super important. One of the roles of the growth board is to only let those projects continue with sufficient evidence. So it's not about the idea, it's about the evidence that supports the idea. And many teams will not have that evidence and it's absolutely fine. And then the growth board, six months later makes the same kind of decision. Is there enough evidence for the next phase? So growth boards don't invest in ideas per se, they invest in teams and ideas go from one phase to the next phase and a lot of those projects will be retired. Extremely important to understand this idea of a funnel and weeding out those projects that should not get follow up investment. So when we create a growth board, we need to ask what are the objectives though? The first one, as I said, is decide which teams get follow up investments and what are the next steps that we think are correct for the team. Because many teams, because they're not, you know, when they start with this, they immediately ask for give me a half a million to build this thing or to make an MVP minimal viable pro product. But often we actually need to ask the teams to do what to go and test willingness to pay a little bit more. So inform that spreadsheet before we actually move to solutions and product prototypes. Okay, super, super important. Now I used the word growth board and investment panel interchangeably. So for far, let's make a difference between the two. The growth board is a permanent institution or body whose job it is to make these decisions. Like I just explained so far, who in the funnel which teams with which ideas should get follow up investment to get to the next phase. So it's a permanent body that does this year in and year out. It's not their 100% job, of course, but they do this permanently in most companies that we see today. And you asked this question before, Lucy. We have ad hoc investment panels and the difference there is they are set up for a specific cohort or an innovation project where we have several teams going through this. Now, it's not that one is better than the other. It's generally a question of innovation maturity. The more mature a company is, the more they have a permanent growth board. The more mature a company is, the less they'll also just work with, with cohorts. But a team can start anytime they want and they have a clear process to test and iterate their ideas and show evidence to a permanent growth board. So big difference. But both are okay. If you have none of these and you didn't think them through, not very good. Right. And we've seen this at the beginning in the questions there was a lot of no. So growth board need to take, keep the bigger picture in mind as well. So it's not just about that investment is actually about the investments within a portfolio. Okay, so keep the portfolio in mind. What kind of balance do we have in the portfolio? And then the second one is how many teams are making progress. Like do we have enough teams that have enough evidence? So you're going to keep these two things in mind. And when we talk about in particular the portfolio mix, I'll go back to something we talked about actually last time when we were looking at return on investment. There are different time horizons. So for efficiency, innovation, so better processes and so you have a one year time horizon. So you need a series of teams that do that. When we're talking about sustaining innovation, the time horizon is two plus years. So there we need to, you know, maybe have more teams as well because it's more risky. So not all of them will succeed. And when we're talking of business model innovation, transformative innovation, we're more in the kind of thing that we've seen with, with the Bosch accelerator where we have transformative innovation. So we need quite a lot of teams to, to create a few winners. Right. Our rule of thumb is at least nine out of 10 teams are not going to succeed. One out of 10 teams is going to succeed. So bringing that together, talking about portfolio mix, as an investment panel, as a growth board, you need to think about return on investment, that the type of innovations you invest in is going to have an impact on the return. So for efficiency innovation, you have a quick return, but not for very long. For sustaining innovation, the return is going to get a little bit, it's going to take a little bit longer until you scale, but you'll have bigger impact on the financials. And for transformative innovation, it's going to take longer, it's going to cost more, but the impact on sustainability of your business is going to be higher. And that all comes together to, you know, something like S curves, like this. So when you have a growth board and investment panel, they need to think about not just investing in the next phase of teams, but making sure that we have teams working on different types of innovation. Super, super important. Now question is who belongs on a growth board and or investment panel and you actually might have both, right? You might have a permanent growth board for some types of innovation. Let's say for transformative innovation you have a growth board and then maybe for some ad hoc projects around AI you might make a separate investment panel which is just for that kind of strategic initiative could be. So most important to understand is that there are two kind of worlds, right? There's the exploration world and there's the exploitation world. And what we really, really want to understand, and we're going to show this in the trigger questions that Lucy helped put together and Tendai we doing a lot of this in the field is in many cases you want to have the right exploit leaders that are part of the investment panel and the the growth board. Why? Because if they're not, then many of the ideas that are explored here. Whoops, sorry. Many of the ideas that are explored on the left hand side will be homeless ideas that will remain homeless when you try to kind of throw them over the fence. So one of the things we really don't believe is that there's a professional innovation team that explores all the ideas, throws them over a fence to an execution entity that's going to take them. They will feel zero ownership. So, so what we generally like most is when we have teams coming from here and we have members of business units and P and LS that also help judge over here because then the buy in will be high and they will contribute to making this work and they will understand what's going on. I will mention a caveat which is that the more transformative ideas get, the more unlikely the people here are to support it. Like in the most extreme case, a new idea could cannibalize a business. So guess what? The P L leader over here is going to say no, no, no, not under my roof. So that can be dangerous. So the more you are in in transformative innovation, the more you need to make sure that when you have people from this side coming in that they can't be blockers because they have a vested interest in the present and a little bit less of an interest in the future of the organization. Sometimes those will be businesses that cannibalize an old business. Sometimes it will simply be an investment because they will say, hey, I can give you a high return on investment the next two years. Why are you giving that money to these teams over here that won't give you a return on investment in the next five years? So this is a super important debate that you have when you set up the growth board. So here a set of trigger questions that we structured into three buckets. Okay. Strategic portfolio management and support. So the first bucket is the strategic perspective. You want to have the people on the growth board investment panels that actually make and shape strategy. So who is responsible for the business strategy and the portfolio guidance? Some of you who are regulars in our events, you know that we call portfolio guidance is what we take from strategy and what guides what kind of innovation projects we invest in. That's the strategic guidance slash portfolio guidance. Super important to have those people on the, on the growth board. The second one who actually leads innovation, those people, it could be that person or those people need to be on the growth board. Sounds trivial, but you want to put them at an equal level of decision making. But these are not necessarily people that do innovation. Those are the, the. An innovation leader's role is mainly political to create alliances across the organization. And then in companies where you do acquisitions, you should have the people who are responsible for mergers and acquisitions, acquisitions on the growth board as well. Big important one is to understand is I talked recently to a large European company and they said, oh, we're going to get growth through M A. They said, well, if you acquire an established business in a growing field, you're going to get some growth for some time. But those established businesses face disruption as well. So you need to help understand that M and A per se gives you some growth, but not necessarily transformative growth. And then lastly, we do want people who lead the corporate venture capital. If you have on that growth panel as well. Sometimes you have, and that's pretty rare still, you have all of these three innovation tools or growth tools under the same roof. Not always the case. If they're not under the same roof, not under the same leader, you need to have them at least together on the growth board. Which sounds trivial, but it's not always the case. So I've seen a lot of companies where M and A corporate venture capital and innovation are not informed by the same strategy, which sounds ridiculously silly. Still happens in many, many organizations. So next perspective, the portfolio management perspective. So who has portfolio visibility. And some of this might be an overlap with the people from before. So the, the people at least somebody who knows what's really going on in different parts of the organization and who understands how to put the dots together to make the connections to create the political alliances. They should be part. At least one person should be part of the growth board, which could be covered by the other trigger questions. But if it's not. You need to have somebody who has this political clout to connect the innovation projects with the right people in organizations. The larger the company, the more that's obviously important. Then big one, who's actually funding this next phase? Sometimes you have portfolios that are funded by corporate, by the CEO, but often you don't. So in the case of the Bosch accelerator, they didn't have any funding. It was actually all funded by the business units. So you need to understand who's funding the next phase. You want to have them on the growth board. So this again sounds like a little bit trivial, but we're giving you these trigger questions so you, you actually, you know, really put together a strong growth board. And then the last one is a little bit different from the second one. Who sponsors the next phase? Who can give the business support? It's not always the same people who have the budget. Budget could come from corporate, for example. So who sponsors the next phase? And it's that drawing that I made before. Homeless ideas that are not embedded in the business will remain homeless if the sponsors are not involved. But you have to manage the sponsors with care because you want them to make evidence based investments in the interest of the company, not just in the interest of their business unit. Super important. That's leadership. When you're not just looking out for your business unit, you're actually looking out for the organization. Last perspective is the innovation support perspective. So who could accelerate the next phase? For example, leaders who have access to customers. Maybe the head of sales and marketing. So you'd be surprised how many innovation teams do not have access to customers. And then which functions matter most for the next phase of experimentation? Does the team need marketing? Does the team, you know, need to comply with really strong compliance rules? If you're in banking, if you were in, in pharma, so extremely important to have the next functions involved as well. If that is important in the, in the next phase. Last bit of governance and decision making. A topic, you know, how to actually make decisions that we've addressed a couple of times, but we'll refine it a little bit and maybe do a session later on once in a webinar. But there are two things you need to get your innovation, your growth board to look at. First one is strategic fit. What are we trying to achieve as an organization? That's the more traditional decision. Is this in line with our strategy, in line with our portfolio guidance. And the second one, that's where we're getting to something that's a bit harder for these growth boards, it's really evidence based decision making. Does the team, I forgot the team there. Does the team have sufficient or does the evidence officially support the idea? The team has to advance it to the next phase of testing. You see also why I wrote to advance it to the next phase of testing. Because growth boards, they're often an execution mindset. Are we going to fund this idea or not? But it's actually not. Are we going to fund this idea? Are we going to fund the idea and the team to go on with experimentation and to go into the next phase? Super, super important to understand that difference. So when we talk to these growth boards, we also make clear we don't care about the activity. We want you as a growth board to look at the amount of evidence that a team can show to support an idea. That's extremely important. Sounds basic, but it's not. So for that we're going to go back to our evidence based, you know, project scorecard. So when we quickly train leaders, generally just like a half an hour before the investment panel, if it's an investment panel, we ask them to first show the teams evidence for customer jobs, pains and gains. Only in a second sprint do we ask them to show evidence for the value proposition. Potentially you could do a product demo at this, at this time, but that's the earliest moment. And then in the third phase, which we call the acceleration phase, we're really going to look at acquisition and retention. So over three phases we look at this scorecard. So in the scorecard you look at the strength of evidence that the team has for the idea. A spreadsheet alone is no evidence. But if you talk to people with, for willingness to pay, you have evidence of level one. If you showed them a storyboard or you know, some kind of spec sheet for a, you know, machine, you now have light evidence from talking to them, but based on something that makes the idea explicit. Then call to action is if you get them to do something, to sign a letter of intent or so maybe to, you know, sign up on an, on a website for an email if you're in business, to consumer, etc. Then a stronger call to action is if they make down payments. If maybe in B2B you have companies that are willing to co create with you, they have to take the time. It's an investment in itself. That's stronger call to action evidence and then real irrefutable evidence from markets when people don't even know it's an experiment. Food companies would put a food prototype in One store in one city to start to understand what's going on. That's irrefutable evidence from real markets. And you would do that for every aspect of the business model canvas, you'd look at the strength of evidence for desirability, feasibility, viability and adaptability. And at each phase you have different levels of scores that you expect. So you tell the leaders, after a first 12 week discovery sprint, we expect evidence of a certain level, evidence of level three for customer jobs, pains and gains. Oh, we fund them for the next sprint. What do we expect at the end of that? Strong evidence all for customers, but also strong evidence for the value proposition. And then in the last phase, strong evidence not just for willingness to pay in financials and profits, but actually for acquisition and retention. And then only can you do, can you make a business plan. Right? So you have these phases in which we invest. So really important to kind of understand that. Now I'm going to just give you one more thing and then we're gonna, we're gonna do a quick hot or not, but I'm gonna just show you one of the challenges in governance, I'll use a case study without mentioning the company, is when you get teams to innovate, sometimes you have an incentive challenge. So if a business leader has a P L to, to manage a profit and loss statement for their business unit, they have zero incentive to give money to a innovation team to explore. Why would I do that? Because then my P L looks bad. So in addition to knowing how to invest, we need to create incentives and that's often what the growth board can do. So we're going to lose this case study. So first thing here is that in this case every local business unit had an EBITDA target that they needed to set. That's pure exploit, right? They needed to calculate that. And of course this is always better when your revenues are higher than your costs. So money spent on innovation does not provide revenue in the same year. So many like we've seen a couple of years later, efficiency and innovation a bit faster. So it only shows up as a cost which impacts my profit and loss. I reduce my profit. So I have no interest to do that. So anything that shows up as a cost is going to lower my earnings. So as a business leader I have no, no, no willingness to do that. So in this case, what the CFO did with us, actually together we created an EBITDA relief. So every dollar that was invested in innovation via the internal accelerator was not included in the EBITDA calculation. So that created an incentive. Now, the CFO was also on the investment panel, right? So you create these kinds of governance structures in the investment panel with the business leaders that help the teams actually, you know, go through this process.